There have been key developments in the physical gold
market over the last few weeks which we feel are worth
highlighting:

1) The Chinese gold imports from Hong Kong in April, 2012 surged
almost 1300% on a YoY basis. Total gross imports for the month of
April were 103.6 tonnes and the net imports were 66.3
tonnes1. It is not the data for April alone which has
caught our eye. There has been a stunning increase of gold imports
through Hong Kong for export into China over the past 2 years.
Between May 2010 and April 2011, China imported a net 66 tonnes of
physical gold through Hong Kong. Between May 2011 and April 2012,
that number jumped to 489 tonnes. This represents an increase of
640%.

2) Central banks from around the world bought over 70 tonnes of
gold in April, 2012. Data from the IMF showed developing countries
such as the Philippines, Turkey, Mexico and Sri Lanka were
significant buyers of gold as prices dipped2.

3) Iran purchased $1.2B worth of gold in April, 2012 through
Turkey. As the developed nations continue devaluing their currency
at the expense of developing nations, countries such as Iran, China
and Mexico are forced to look at alternative stores of
value3.

4) After twenty years of lackluster returns and stagnant bond
yields, Japanese pension funds have finally discovered the value of
investing in gold. The $500M Okayama Metal and Machinery pension
fund placed 1.5% of its assets into gold bullion-backed ETFs in
April in order to "escape sovereign risk"4.

5) Bill Gross writes5, "Soaring debt/GDP ratios in
previously sacrosanct AAA countries have made low cost funding
increasingly a function of central banks as opposed to private
market investors. Both the lower quality and lower yields of
previously sacrosanct debt therefore represent a potential breaking
point in our now 40-year-old global monetary system. […] As they
(investors) question the value of much of the $200 trillion which
comprises our current system, they move marginally elsewhere - to
real assets such as land, gold and tangible things, or to cash and
a figurative mattress where at least their money is readily
accessible". Is the bond king recommending gold? YES, YES YES!

6) The Gold Mining ETF, GDX, has seen strong inflows in the past
3 months. The number of units outstanding have increased from
162.5M6 to roughly 187M7 between March 1,
2012 and May 31, 2012. This represents an increase in assets of
almost $1.2B in a span of 3 months. It is worth pointing out that
for a majority of this three months period, GDX, and by extension
the gold mining companies were experiencing significant declines in
their market values.

We believe there has been a material change in the gold
investing landscape. The HUI, which is the Gold Bugs Index, is now
up over 20% from its lows since May 16th, 2012. The slide in gold
equities seems to be subsiding as a foundation for a strong move
upwards is set. New buyers, represented by the Chinese, central
banks, Japanese pension funds and the Iranians, bought almost 140
tonnes of gold in April alone. To put this into perspective, the
annual gold production is approximately 2600 tonnes8.
China and Russia produce around 500 tonnes of gold annually, which
never makes it to the open market. This leaves about 2100 tonnes of
gold production annually for the rest of the world.

When buyers representing 140 tonnes of new demand enter a market
which only has 175 tonnes of monthly supply, we are left wondering
about two things:

1) In a balanced market, where is the source of supply to the
new buyers going to come from?

2) How can a new buyer of size get into the gold market, which
is already balanced, without significantly impacting the price of
gold?

The answer is fairly obvious. When demand outstrips supply,
prices move higher. These significant macro changes in the
supplydemand dynamic of the gold market should propel the price of
gold to new highs.

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